Friday, November 30, 2012

Earlier
this week I attended the NATP’s annual year-end tax update seminar, as I have been
doing for more than 20 years.It used to
be “famous”, but now it is “essential” - and is therefore titled “The Essential
1040”.I attended one of the several
offerings located in New Jersey.

At
the seminar we reviewed in detail the new Part IV “Due Dilligence Requirements”
on Pages 3 and 4 of the form.In my opinion the new hoops that we are
required to jump through are TOTALLY RIDICULOUS!

Here
we go again!

As
I have said time and again, we must call a spade a shovel.The Earned Income Credit is a federal welfare
program.Period.In terms of dollars distributed it is, I
believe, the largest federal welfare program.

At
this point in the discussion I must always make the following statements of
personal beliefs -

(1)There is nothing wrong with the
concept of the government providing “welfare” to qualified, “deserving”
citizens.And there is nothing wrong
with the government providing encouragements or “rewards” to the working poor
with dependent children.

(2)The government has the
fiduciary responsibility to make sure that those who are receiving public
assistance, benefits, or “encouragements” are truly “deserving” and meet the
requirements established for receiving such benefits.

Using
the Tax Code to distribute welfare, or other government assistance, benefits,
or “encouragements, is not good tax policy and not good fiscal policy.

And
forcing tax preparers to be Social Workers and do the government’s job of
verifying that an individual qualifies for welfare benefits is a bad idea.It is a job we tax professionals should not
accept.

The
following are excerpts from my series on MY OBLIGATIONS posted here at TTP in
November of 2011, which discussed what I consider to be my obligations to my
clients, my practice, and the Internal Revenue Service as a professional tax
preparer.I have highlighted certain
statements -

When a client “engages” me to
prepare his/her individual income tax returns he/she is basically asking me to
assist him/her in preparing a government report.

When preparing tax returns I assume that, unless I have direct
personal knowledge to the contrary, the client is telling me the truth.

If a client tells me or
indicates on a worksheet that the gross income from a part-time sideline
business was $3,525, or that the total medical expenses for the year were
$6,257, or that he/she drove 4,206 miles for business I will believe this to be
true (again, unless I have direct personal knowledge to the contrary). It is not my responsibility to personally
verify all the numbers or statements given to me by a client. I have no obligation, legal or ethical, to
audit your return. This is up to the IRS, if they so choose. I am simply preparing the return, to the
best of my ability, “based on information supplied by the client”.

It is my obligation, and
responsibility, to tell clients about the IRS standards and requirements for
documenting income, deductions and credits.
But that is where it ends.

Due
diligence requires me to ask questions of the client if there is something
about which I am unsure, or which appears to be “questionable”, and to make
sure that I have all the facts necessary in order to determine whether a
deduction, exclusion, or credit is allowable or appropriate.It also requires me to, as quoted above, tell clients about the IRS standards and
requirements for documenting income, deductions and credits.It DOES NOT require me to personally verify
each and every item of income, deduction, or credit claimed on the return.

The benefit provided by the
Earned Income Credit should NOT be distributed via the Tax Code.It should be distributed the same way as other
forms of welfare, with the same safeguards and regulations that are administered
by the federal or state employees who administer these other forms of welfare.

Considering
the ridiculous new “hoop jumps” required by the IRS, if I were still accepting
new 1040 clients I would must definitely refuse any returns that included an Earned
Income Tax claim.As it is, I will not
prepare the 2012 Form 1040 (or 1040A) for an existing client who appears to
qualify for, and wants to claim, the EIC.There is too much work, and
agita, involved, and too much potential for substantial penalties.

While
the NATP and other membership organizations do a good job of speaking on behalf
of tax preparers before the federal government and its agencies and
representatives, what tax pros of all designations need is an organization
whose sole purpose is to actively and aggressively campaign against such abusive and inappropriate
rules and regulations like the excessive EIC due diligence requirements (and for a grandfathering exemption from the
RTRP test for experienced tax pros).

If
the Earned Income Credit must continue to exist in the Tax Code, the very most that tax preparers should be
required to do is have taxpayers claiming the credit personally fill out Part I
and Part II or Part III of the Form 8867 and sign it under penalty of perjury.The signed form would be attached to the 1040
(or 1040A).

The
seminar also wasted 2 hours that could have been devoted to more important and beneficial
federal tax information on the topic of ethics.Unfortunately this must be done at this seminar to cover the IRS demand
that EAs and RTRPs (and potential RTRPs) sit through 2 hours of ethics each
year as part of the annual 15 hour CPE requirement.

Regardless
of how well the topic was presented by the instructor, the ethics component was
truly redundant.I have sat through the
same presentation time and time again.And
I am no more, or less, ethical than I was five years ago.

One
item that is covered in this presentation is totally ridiculous and makes
absolutely no sense to me.

I
am at a local store or restaurant and I run into longtime client Joe.While we are smoozing Jim, another client of
mine, enters and sees us.Jim knows Joe,
but was not aware that I also know Joe.Jim shows surprise and asks how we two know each other.From what the instructor said, I am not
allowed to say, “Joe has been a client for years”.

As
long as I do not reveal personal and confidential financial or tax information
about Joe to Jim, and vice versa, which I would not do, who gives a flying sex
act if I happen to tell Joe that Jim is also a client? Regardless of what the instructor said, in
such a situation, unless Joe specifically asks me not to tell Jim, I am
certainly going to say, “Joe has been a client for years”.The IRS be damned!

I
would like someone to give me a good reason why I should hide the fact that Joe
is a client from Jim.

Your comments on both, or either, issue are solicited.

As
usual the NATP seminar was a good, and except for the ethics component,
productive one.I do believe that NATP
is the best provider of federal tax CPE.

Wednesday, November 21, 2012

In her post “EITC Checklist Expanded” Trish McIntire, thankfully back to blogging at OUR TAXING TIMES after
taking some time off, explains that the IRS is getting more out of hand with
its “due diligence” requirements for tax preparers who are claiming the Earned
Income Tax Credit for clients.

“The
current form 8867 not only acts like a check list for each EITC qualification
but now asks about what documentation was provided and what follow up questions
the tax preparer asked. For example, one new question ask if the tiebreaker
rules were explained when the qualifying child could be claimed by more than
one taxpayer. The new page wants to know what documentation, if any, the preparer
saw to verify EITC issues like residency, business income and child disability.”

Trish correctly points out that “Preparers have always been told that we
aren’t responsible to audit the records taxpayers bring in to us.”But this is apparently not the case with the
EITC.

Here is the story.The EITC is a welfare program – the largest
federal welfare program.Because this
particular form of welfare is “distributed” via the Tax Code, and it often “refundable”,
allowing a taxpayer to actually make a profit by filing a tax return (and
distorting the federal budget and creating a big part of the “47%”), it is, as
Trish properly identifies, “a fraud
magnet”.Various reports over the
years have suggested that as much as 30% or more of all EITC claims are
erroneous, resulting in billions of dollars of fraudulent payments.

And because it is “distributed” via
the Tax Code, and the resulting huge amount of fraud involved, the tax
professional has been forced to become a “social worker” and do the
government’s work in verifying that the claimant is truly entitled to the welfare
benefit – more so than for any other tax deduction or credit.

Is this fair or proper?Certainly not!

In my specific tax practice it is
not too much of a problem.I no longer
accept new clients, so I do not have to deal with any new EITC claimants.And most of my existing clients are older
with grown children, so I have very few EITC claims to deal with, and with
those very few I am well aware of the claimants’ situation as I have been
preparing their returns for years.

But if I were still “open to the
public” and soliciting new clients I honestly believe that I would refuse accepting
any EITC returns.It would not be worth
the potential agita or the potential penalty liability.

Trish believes the “EITC is a good program and helps a lot of
families”.But in reality it is NOT
a good program.The idea of providing
financial assistance to the working poor with dependent children is a good one –
but doing it via the Tax Code is definitely not.

Clearly the idiots in Congress must
deal with this problem when they decide to seriously address the need for
substantive tax reform, hopefully early in 2013.

Monday, November 19, 2012

Back
in September I wrote a letter to the Carol Campbell, the new Director of the
IRS Return Preparer Office regarding my issues with the IRS tax preparer
regulation regime – specifically the need for a “grandfather” exemption from the
initial competency test for experienced tax professionals like myself and the
error in exempting CPAs and attorneys from the testing and CPE requirements.

On
November 17th I received a letter, dated November 13, 2013, from
Preston B Benoit, Deputy Director of the Return Preparer Office in response to
my letter to Ms Campbell.Here is the
text of the letter -

“Dear
Mr. Flach:

I
am responding to your letter dated September 10, 2012.You requested an exemption from the new
testing requirements for federal tax return preparers.You believe that experienced tax
professionals who remain current in tax law should be exempt of “grandfathered”
in the Registered Tax Return Preparer designation.

Before
finalizing these requirements, we requested extensive input and held a series
of public meetings in 2009 soliciting written public documents.We received over 500 responses to IRS Notice
2009-60.On August 19, 2010, we
published proposed regulations on the competency test and continuing education
(CE) requirements.We received more than
60 written comments on the proposals, including comments from organizations
representing a substantial number of tax return preparers.We also held a hearing on the proposals on
October 8, 2010.

After
carefully weighing all input, we published final regulations on June 3, 2011,
that officially exempted Attorneys, Certified Public Accountants, and Enrolled
Agents from the new testing and CE requirements.We also separately issued guidance exempting certain
non-signing supervised preparers and individuals who do not prepare any Form
1040 series returns.

I
appreciate your experience and suggestions, but we cannot approve your request
for an exemption from the new IRS testing requirements.

If
you need further assistance, please call me at (202)927-6428.

Sincerely,

Preston
B. Benoit

Deputy
Director, Return Preparer Office"

If
you read my letter you can see that I
did not request a specific exemption from the testing requirements for myself.I was suggesting that ALL experienced
preparers like me be exempt from the test under “grandfathering”.

I
am well aware of the process that the IRS underwent before issuing its final
regulations.My response, in which I
said pretty much the same things I said in my letter to Ms. Campbell, was among
the “over 500 responses to IRS Notice
2009-60”.I believe it is actually
published somewhere in an IRS document.

While
of no real value, the response at least acknowledges the receipt of my correspondence
and indicates that someone, perhaps not the person to whom it was addressed, may
have actually read it, although not carefully.It did not address the reasoning behind the IRS decisions not to grandfather
and to exempt CPAs, attorneys, and “supervised employees” from the requirements,
or suggest that these decisions might be reviewed.

When
I write a letter to a specific person I usually expect a response from that
person.Oh well, at least the response
came from the Deputy Director and not some clerk or secretary considerably
lower on the ladder.

The
need to “grandfather” experienced tax preparers is more important than ever,
considering the huge number of “potential RTRPs” who have not yet sat for the
test (as I pointed out in my post “There Must Be Grandfathering”).

As
of November 5ththere are
still 314,860 “preparers with provisional PTINs who have not yet passed the
RTRP test”.Since the test was first
offered about a year ago only 32,902 have passed the test.So in the past month only 10,343 preparers have
taken and passed the test.

Is
the IRS really willing to refuse potentially between 150,000 and 200,000 individuals
the ability to continue to make a living in their chosen profession?Forbidding the taxpaying public access to so
many competent and experienced preparers is not good for anyone!

I
continue to urge membership organizations like NATP to take up the cause of “grandfathering”
and actively campaign for it.And I urge
my fellow tax professionals to write to Ms. Campbell requesting that
grandfathering be instituted.

It
will be interesting to see who BO appoints as the new Commissioner of the IRS,
hopefully in January.

Thursday, November 15, 2012

A recent item at TheStreet.com on
the effects of possible tax simplification on the H+R Block stock told us -

“BTIG analyst Mark Palmer writes that ‘some clients have ‘expressed
concern’ about ‘the possibility that the U.S. government will embark on a new
program of tax simplification that would obviate much of the need for tax
preparation assistance’."

I do not think tax preparers have
anything to worry about.It is true that
increased complication does increase business (The Tax Reform Act of 1986, a
major rewrite of the Code, was properly nicknamed “The Accountant’s Full
Employment Act) - but the opposite is not necessarily true.

While I have little hope that
there will be true substantial tax reform or a true simplification of the
mucking fess that is the Tax Code in 2013, I, a veteran tax professional, would
truly welcome it.I have said over and
over again that dramatically simplifying the Tax Code would NOT affect my
business.

If I were to spend each day during the tax season preparing nothing but
1040A forms, I guarantee that I would bill more fees, spend less money, reduce
my potential liability, and have less agita to deal with both during and after
tax-time. While I obviously charge a higher fee for more complicated
returns, I make less profit per hour on these returns. I honestly believe that a truly simple Form 1040 would increase both my
efficiency and my bottom line.

If tax returns were much easier
to prepare I do not see my clients leaving me en mass to do their own returns. Many of my current 1040 clients could probably
prepare their own tax returns under current law. They come to me because they do not want to be
bothered with the task of doing it themselves. Because my fees are reasonable it is easier,
and more cost and time effective, to have me do it. Plus they want to be sure they do not miss
anything.

And with any tax simplification
there would still remain enough complexity in certain areas of the Code to keep
us busy. We would still need to prepare
a Schedule C for business income, a Schedule D for capital gains and losses,
and a Schedule E for rental income.

So tax professionals should not
fear tax simplification.We should embrace
the possibly and actively campaign for it.

Monday, November 12, 2012

Currently, in order to be allowed
to prepare 1040s for compensation, you must register with the Internal Revenue Service
and receive a PTIN, and, unless you are a CPA, an EA, an attorney, or a “supervised
employee”, pass an initial competency test and maintain at least 15 hours of Continuing
Professional Education (CPE) in federal taxation, with at least 3 hours in updates
and 2 hours in ethics, each year.

The initial competency test is required
regardless of how long you have been preparing 1040s.But is there really any value in this initial
competency test?

Thanks to Congress the mucking
fess that is the Tax Code is constantly changing.And, hopefully, in 2013 it could change even
more so if Congress does the right thing (but don’t hold your breath) and enacts
serious and substantive tax reform.

If I, who has been preparing
1040s without incident consistently for over 40 years, am forced to sit for the
test I will not be doing so until after the 2013 tax filing season (when 2012
tax returns are filed).The test will be
based on the Tax Code as it is in effect for 2012 returns, or 2011 returns (I am
not sure).

Let us say I pass the test and
shortly thereafter, before the end of 2013, the Tax Code is substantially rewritten.I will
have proven basic competence in tax law that, for the most part, is no longer
applicable.

The CPE requirement is much more
important than the initial competency test. Being required to remain current in tax law by
taking at least 15 hours of CPE each year is certainly a better indication of competence
than any test that is, regardless of what happens in Congress, at least
partially obsolete once passed.

While I may be able to accept
CPAs and attorneys being exempt from the competency test, since it is really
not of much value anyway, it is a huge mistake to exempt these so-designated
professionals who want to prepare 1040s for compensation from the 15 hours in
federal taxation CPE requirement.

It is true that these
professionals already have CPE requirements within their individual designation
– but none of the required CPE has to be in federal taxation.If a CPA wants to be a compensated 1040 preparer then he/she
should be required to include 13 hours of CPE in federal taxation in his/her
existing annual CPE requirement to maintain certification as a CPA, and the same for
attorneys.CPAs and, I expect, attorneys
are already required to take the annual 2 CPE hours in ethics preaching.This would certainly not be an added burden
for these professionals, as they are already required to take CPE.To be honest, many CPAs who do prepare 1040s
already take some, if not 13 hours, CPE in federal taxation each year.

It is correct for the IRS to want
to register tax return preparers via the PTIN system.And it is proper for the IRS to require that
these preparers remain current on federal tax issues via required CPE.The CPE requirement is not an added burden on
serious and legitimate preparers – as I have said all along, if a serious tax
preparer is not already taking at least 15 hours per year in tax CPE he/she
certainly should be.But the initial
competency test is indeed a burden that in reality has minimal value.

The IRS should do away with the
initial competency test for becoming a RTRP.If it does not do away with it completely, it should at least initiate a
“grandfathering” exemption for experienced tax preparers.

And CPAs, attorneys, and “supervised
employees” should not be exempt from the CPE in taxation requirement. These individuals should be subject to the same requirements as the "previously unenrolled" and also be issued the separate RTRP designation.

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About Me

I am a professional tax consultant with 40+ years experience preparing individual income tax returns for people in all walks of life, from professional football players and actors to doctors and architects to secretaries and clerks.
I am a member of the National Association of Tax Professionals.
I was born and raised in Jersey City, New Jersey, but recently moved to Northeast Pennsylvania.
After the "tax season" is over I enjoy travel via all methods (bus, train, ship and plane), going to the theatre (local, regional, off-Broadway and Broadway), and "blogging".